Thursday, March 01, 2007


It drives me insane when I hear people say gold is a conservative investment, for example, this article in the WSJ. To be fair, I don't think the author is necessarily saying gold is safe, but plenty is implied.

I'll debunk this myth very quickly, because I don't feel like wasting my time.

1) Gold has very little intrinsic value. Gold's use in industry is limited, and its use for jewelry does not justify its price. Gold is used as a means of speculation, and that's why its price is so high. Well, that and the fact that super villains are always trying to steal it.

2) Besides, the intrinsic value = conservative argument is never applied to other commodities, like oil or orange juice. Why not? Because pirates never plundered orange juice? People are still suspicious of a Trading Places scenario? I have no idea.

3) Gold suffered through a 20 year bear market from 1980 until just a couple years ago. For most of 1980, gold was above $600. For most of the 1990's, gold was below $300, so if you bought in 1980, you'd be carrying a 50% loss for most of that period. How could any investment with that kind of history be considered conservative? Are people distracted by the shiny colors?

4) Gold is really a bet against your local currency. Basically if your local currency depreciates, then it will take more of it to buy anything, including gold. But does anyone tout currency futures as a conservative investment? And why not? Xenophobia? Who knows?

My point here is not that gold is over or undervalued here. My point is calling is conservative is ridiculous.


Vivek Vish said...

Given point 1, I wonder about why point 4 is true. Wouldn't a representative basket of tradeable goods in the economy be the best way to hedge against currency depreciation?

The only reason gold should provide protection against currency depreciation in general is because everyone agrees that it does.

Given that gold is unreactive and long-lasting, the gold being mined isn't replacing old gold. It's just more gold in the system. If humans were rational, one would expect gold to continually depreciate until it is no longer worthwhile to go through the environmentally destructive and expensive process of mining a useless rock out of the ground.

Accrued Interest said...

Couldn't agree more. Gold shouldn't be any more a currency hedge that any other single commodity... except that every one uses it that way.

Gold is a relic. It was currency once upon a time, but so what? We've evolved beyond that.

rockain'tdeadyet said...

True, but there are those takes a lot of gold to boil someone in. Next thing you know they're injecting Magneto's accomplice with adamantium or poisoning some poor ex-KGB with pollonium.
I'm waiting for the IUM index: Titanium, Uranium, Palladium, and so forth.

I completely agree with you and would much rather be long silver or copper, for example. It isn't as if we don't have precious metals with industrial uses to choose from.

That said, without the speculative premium currently priced in, gold is simply another way to play the luxury goods phenomenon. High couture doesn't have any industrial applications either, it's just a consumer good aimed at the increasing wealth of the top twenty percent of the global economy.

Vivek Vish said...

Maybe, rockain'tdeadyet, but people rarely buy a yacht or an albino peacock hoping for it to rise in value. Furthermore, holding a futures contract for delivery of gold in June is not a form of conspicuous consumption.

Accrued Interest said...

Yeah I agree with vivek... sounds like a greater fool play to me.

rockain'tdeadyet said...

Agreed, "without the speculative premium". A 20,000$ gold necklace is like an albino peacock -it's supposed to make your wife look good, not go up in value.
The speculative premium is a different story entirely. The speculators are the same ones holding a couple hundred thousand contracts of light sweet crude for Cushing delivery. They never intend to take delivery -it's a trade.

zephyr said...

The supply of gold is artificially reduced by the hoarding for investment and in sovereign treasuries. If those hoarded quantities were released into the market, gold would be a cheap metal.

Accrued Interest said...

Here is the difference between gold and oil. People need oil.

Adventures In Money Making said...

isn't it strange that gold arose as a currency simultaneously in various parts of the globe and stayed that way for thousands of years until early 1970s when Nixon suddenly decided to peg the value of the dollar to gold?

Anonymous said...

After 100 viewings or more, I still don't know for the life of me what Aykroyd yells to turn the OJ futures...

Thanks for a terrific blog.